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Stocks have heaved a sigh of weariness over worsening fundamentals and widening government hostility in the past week, as a hopefulness in Washington has given way to politics.

Leaders so far this year include biotech and brokerages while laggards include banks and truckers. It appears that every chance that shareholders get these days, they dump shares.

That is not the sign of a healthy market. It is the hallmark of a market in which bears are basically just watching bulls from the sidelines and just laughing at their impotence.

If it’s not a major company reporting weak earnings, as Cisco Systems (CSCO) did tonight, it’s the president of the United States dictating the pay scale of banking executives as if that will solve everything.

When you combine weakening credit capacity at banks with hostile government overseers, mix in lousy earnings and blend with a rising number of layoff announcements, it’s just not a great environment for investment.

Of course, investors could easily ignore all the negatives if they wished and climb the proverbial wall of worry, but they’re not.

There could be a pretty sizable bear-market rally any time now, but I continue to recommend that investors remain defensive, with a bond/stock allocation of 75%/25% if you are willing to take on some risk.

Need Drugs?

The strongest leadership in the market this year is coming from the drug sector. Let’s take a quick look at one: AstraZeneca (AZN), which is one of our StrataGem positions this month.

The second largest drug maker in the United Kingdom, AZN was formed in 1999 in a merger between Astra of Sweden and Zeneca Group of the Great Britain. As with other companies in the pharmaceutical industry, AZN generates much of its revenues from its high-margin patented drugs. Its risks include the expiration of its patents and the stringent regulatory environment.

A key strategy for AZN in the past two years has been growing through acquisitions. In 2006, it acquired Cambridge Antibody Technology, which added many pipeline products. Its most recent purchase, in late 2007, was MedImmune, and it paid a stiff price at the top of the market: $15.6 billion.

As a result of the acquisition, AZN took on $14 billion in debt, raising the company’s debt to equity ratio to 83%. Going forward, chief exec David Brennan has said the company will try to grow through partnerships and collaborations.

But after rival Pfizer announced it planned to buy Wyeth last month, many of the big pharmaceutical companies, including Roche Holding and Novartis, are looking to respond with acquisitions and deals.

Biggest Risk

These drugs generated $15 billion sales in 2007, more than half of the year’s total sales. In fact, Astra’s top drug, Nexium, which generated $1.32 billion in sales in the most recent quarter, will have to compete with generic heartburn drug Prevacid this year.

Perhaps in a sign of what to come, Astra recently had to fend off a couple generic patent-violating drugs prematurely entering the market. Late last year, it settled a lawsuit with Teva Pharmaceutical Industries regarding Teva’s generic budesonide repsules, a generic version of Astra’s Pulmicort Repsules asthma medicine.

What’s in the Pipeline?

With generic drug-producing pharmaceutical companies waiting in the periphery for many of Astra’s patents to expire, Astra is relying heavily on drugs in the pipeline.

The company will seek regulatory approval this year for four new products: lung cancer drug Zactima, painkiller PN400, blood thinner Brilinta, and a combination pill of cholesterol drug Crestor and TriLipix from Abbott Laboratories. Astra’s diabetes treatment drug Onglyza is also under review in the US and the European Union.

Other factors in AZN’s impacting performance in the months ahead include exchange rate fluctuation and labor costs. In 2008, AZN benefited from the strengthening dollar, as almost half of its sales are in the United States. As part of AZN’s 2008 plan to curb costs and increase efficiency, the company has a plan to cut 15,000 employees by 2013 to save $2.5 billion annually. Astra cut 9,000 jobs last year and recently announced 6,000 more job cuts; these cuts amounted to 23% of their workforce.

Thus far, AZN has benefited from its diverse product portfolio, but with the upcoming expiration of its patents, its performance will depend on its pipeline drugs and collaborations with other companies.

Many analysts are skeptical that revenues from these pipeline drugs will be able to cover losses in patent revenues. AZN reported a 1.4% decline in fourth-quarter net profit from the previous year to $1.25 billion. AZN projects flat sales in constant currency for 2009 but announced increased annual dividends by 10% to $2.05 a share.

The Bottom Line

AZN is a big solid major drug maker that’s paying a hefty dividend. It’s probably not going to go up a whole lot, but it is behaving much better than the market and is supported by that fat divvy. Buy on dips to play defense.